Good luck with the Lotto Tickets OTM Puts on expiry day.
How to short the S&P using options? Day & swing puts
- Thread starter KCalhoun
- Start date
Why is that a bad trade? The market is tanking. I should know, I am long.
So why is buying outright puts a bad idea? Only thing you lose is the premia.
If he thinks we're crashing, buying puts is good, yes?
Why did you intimate it is a "lotto ticket"? It is just a trade.
Here's an example...
https://www.elitetrader.com/et/threads/and-they-have-a-plan-live.306838/page-37#post-5455105
See my open positions there? Isn't that the same bloody thing? Aren't my open futures positions on the YM and ES basically deep OTM calls I bought, with 3 months to expiration?
Sorry I just don't understand your point. I've done this exact trade multiple times, it's a real thing.
Ken, since you mentioned you want even more leverage than the 2x/3x inverse ETF's, lets do some math (and someone feel free to correct me if I get something wrong).
Assume that to short the S&P, you're gonna use SPXU. Here we see the chart for Friday. Lets say you are lucky enough to catch the absolute bottom and buy on the low tick, and hold till the end of the day for the high tick. This means you gained 64 cents. Now I'm not sure what kind of size you're trading, lets say something like 1000 shares for this. That low tick is at about $15.35, so you need 15k in buying power. Obviously if you held for the full 64 cents profit, you made $640.
But we also need to consider what you're risking. Maybe you don't want to risk more than $200 on a trade, since I know you put on lots of trades, so with 1000 shares, you can only let these drop 20 cents before you'd be stopped out.
So if we know you're gonna risk $200 on this trade, lets see what throwing $200 at options would get you. Lets say you will go all in on the 449 put (all in vs. buying a couple of different strikes). The low tick looks to be 14 cents, but lets say, just to be generous and make this example less ideal, you get them for 20 cents each. This would cost $20 per option, so if risking $200, you could technically buy 10 options. (not including commissions here).
Now we see the value of this option go as high as 3.60. As in the SPXU example, lets assume you time this almost perfectly and get out for 3.50. This means you receive $350 per option, minus the $20 it cost you, so a profit of $330. But since you had 10, this means a total of $3,300. This is more than 5 times the profit of $640 for buying the ETF, without having to use 15k in buying power. Plus, the most you would ever lose with the option route is the cost of the option, so $200, and there is no guarantee that if SPXU dropped, that you could in fact get out for a loss of 20 cents per share. Maybe there would be slippage, or maybe even your psychology would tell you to hold longer, and lose more if you don't exit as intended. The option has a fixed loss if you assume that you will just let it expire worthless and hence always just buy cheap options.
Now clearly this is the most ideal example, and something as simple as just buying the option with more than 1 day till expiry will affect things greatly, but this is an easy place to start.
Assume that to short the S&P, you're gonna use SPXU. Here we see the chart for Friday. Lets say you are lucky enough to catch the absolute bottom and buy on the low tick, and hold till the end of the day for the high tick. This means you gained 64 cents. Now I'm not sure what kind of size you're trading, lets say something like 1000 shares for this. That low tick is at about $15.35, so you need 15k in buying power. Obviously if you held for the full 64 cents profit, you made $640.
But we also need to consider what you're risking. Maybe you don't want to risk more than $200 on a trade, since I know you put on lots of trades, so with 1000 shares, you can only let these drop 20 cents before you'd be stopped out.
So if we know you're gonna risk $200 on this trade, lets see what throwing $200 at options would get you. Lets say you will go all in on the 449 put (all in vs. buying a couple of different strikes). The low tick looks to be 14 cents, but lets say, just to be generous and make this example less ideal, you get them for 20 cents each. This would cost $20 per option, so if risking $200, you could technically buy 10 options. (not including commissions here).
Now we see the value of this option go as high as 3.60. As in the SPXU example, lets assume you time this almost perfectly and get out for 3.50. This means you receive $350 per option, minus the $20 it cost you, so a profit of $330. But since you had 10, this means a total of $3,300. This is more than 5 times the profit of $640 for buying the ETF, without having to use 15k in buying power. Plus, the most you would ever lose with the option route is the cost of the option, so $200, and there is no guarantee that if SPXU dropped, that you could in fact get out for a loss of 20 cents per share. Maybe there would be slippage, or maybe even your psychology would tell you to hold longer, and lose more if you don't exit as intended. The option has a fixed loss if you assume that you will just let it expire worthless and hence always just buy cheap options.
Now clearly this is the most ideal example, and something as simple as just buying the option with more than 1 day till expiry will affect things greatly, but this is an easy place to start.
Thanks! Excellent example, well thought out. Good points re buying power and leverage differences vs spxu/etfs. I also really like your point re max stop cost is built in eg if it expires worthless, vs managing etf s/l exits.
Still not clear though on what exactly to buy, eg what put at what strike?
My thesis is, best case on a red day, the S&P will drop 1ATR, eg it'll sell down a typical day's range.
So I login to my fidelity account, what next? I'm assuming I enter ticker for SPY, or...? And pull up options chain for....(daily/weekly...?).
I'd test by buying a single put... don't know what or how. Definitely just want to daytrade eg buy puts by 10am, sell at 3-4pm
Much appreciated. I'm interested
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You are down with avoiding ITM options to "avoid paying Intrinsic"?? To buy ATM??? Let's ignore Delta/dollar neutral..
I get buying the OTM tickets with 1 or 2 days left,but I don't get buying ATM over ITM unless vol is,super cheap and you are inclined to be a backspreader (long gamma)
I get buying the OTM tickets with 1 or 2 days left,but I don't get buying ATM over ITM unless vol is,super cheap and you are inclined to be a backspreader (long gamma)